Anthony Valeri, CFA is a market strategist at LPL Financial and he took the time this week to respond to some rather disturbing comments made in regard to bond investing and rising interest rates. The following is a brief summary of his/my perspective.
“It seems there is no shortage of investors willing to forecast the impending doom for the bond market stemming from a reversal of the long decline in interest rates. Last week, the commissioner of the Securities and Exchange Commission (SEC) Daniel Gallagher stated that “financial armageddon” awaits municipal bond investors due to rising interest rates. Commissioner Gallagher tried to retract comments late in the week, saying he was merely trying to make bond investors aware of potential risks, but nonetheless joined a long list of doomsdayers who have used blanket statements and hyperbole in what seems to be the market participants’ incessant desire to spot the next “bubble.”
We have long advocated a defensive stance against interest rate risk and maintained that the prospect of rising interest rates will continue to pose a risk to bond investors. However, how much of a threat a rise in interest rates is to an investor depends on multiple factors. Sector allocation, maturity exposure, time horizon, and whether or not interest income is reinvested or simply spent, all influence potential returns during a potential bear market for bonds.”
Know what you own. If you need help assessing your risk, let me know. I’m here to help.
Until next week,
Susan R. Linkous
Note: Bonds, including municipals, are subject to market and interest rate risk if sold prior to maturity. Bond values and yields will decline as interest rates rise, and bonds are subject to availability and change in price. Interest income from municipal bonds may be subject to the alternative minimum tax. They are federally tax free but other state and local taxes may apply.